There has been a lot of talk about SMS loans in recent years and what interest rate they have.
Many people talk about it being a very high effective interest rate while the loan institutions often say that there is no interest at all on the loans they have, this was especially common in the past. Here we will explain a little what to consider when talking about SMS loans and interest rates.
What should the credit institutions report?
A lending institution that offers SMS loans is required by the Consumer Credit Act to print its prices in interest and fees. The fees here must cover the costs that arise directly in connection with the loan applied for. If the institute then wants to take out more money for the loan, this should be called interest, so it is not allowed for a lender to have fees that give them profit but all profits should come from interest.
The authorities have become much more careful with this in recent years when it was previously common for lenders to only have a fee for their loans. Now, basically everyone has interest as part and fee as part. Something that is positive for you as a borrower.
The fact that it has become more common to collect money in the form of interest is good for you who lend when you get a deduction on this amount. When you make a declaration, you may deduct 30% of the interest costs that come with a loan. For the fees you are not allowed to make any deductions at all which means that a loan where a large part is interest will be cheaper than one with the same price but with most fees.
However, it is common for companies to report these amounts as a cost where everything is included. Sometimes it can be difficult to find the breakdown on their sites even if it is there.
Is effective interest rate a good measure for SMS loans?
To get an effective interest rate for a loan, you take and calculate all the costs that come with a loan. This includes interest, fees, setup costs and anything else that costs something. The sum you arrive at is then presented as a one-year interest rate.
Since an SMS loan normally only extends over 30 – 90 days, the effective interest rate becomes very high as it is a figure that is calculated on an annual basis, the effective interest rate can be over 1,000% for a loan. This means that effective interest rates are not a good way to compare an SMS loan with longer loans such as private loans.
If you want to use effective interest rates, however, it is good if you compare two SMS loans that both extend over the same number of days. Then it becomes a sensible comparison that shows which loan is the cheapest, even if the percentage that the effective interest rate shows is high.
How to think about SMS loans and interest rates?
Instead of concentrating so much on the interest rate when it comes to SMS loans, our tip is that you instead compare what the total cost will be. This is always clearly presented on the loan institution’s website. The cost is so low that it is easiest to get a good picture if you look at how much it costs in red kronor. For large and long-term loans, however, it is not at all as easy to think about what the loan costs in USD and then the effective interest rate fits much better.
It is better then to decide if it is worth paying the price it costs to borrow the money in the short time. Staring blindly at interest rates is not as effective. Ask yourself if it is worth X number of USD to borrow X USD for X number of days. If the answer is no, you should not borrow money and if the answer is yes, simply submit an application.